On November 8th, 2008, the NASDAQ-100 put in a low in the largest bear market since the 1929 crash. On March 9th, 2008 the S&P 500 put in its low, as the tech heavy NASDAQ-100 made a higher low. This was the first indicator that the next bull cycle would be tech driven. More times than not, the new leadership will bottom first, and lead us out of the bear cycle.
The following bull cycle led to some of the greatest gains in tech’s history. At the time of the 2009 low, companies like Amazon, Google, Facebook, and Netflix were either not public companies, or obscure tech names with uncertain business models. These names came to provide some of the greatest gains over the last decade, as they rose to become some of the most valuable companies in the world.
Big Tech, as encompassed by the Nasdaq-100, was the most popular winner in the last bull market. From its 2008 low to the November 2022 high, it returned an astounding 1545%, compared to the S&P 500’s 622% returns within the same cycle.
However, few are aware that there was a sector within tech that not only performed better than the FAANG driven NASDAQ-100, but also led the market – semiconductors. Like the NASDAQ-100, the popular VanEck Semiconductor ETF (SMH) bottomed on November of 2008. However, during the same cycle it returned 2105%.
The FAANGs revolutionized the lives of the consumer, making them popular choices in most portfolios. Underneath these consumer products, was the need for semiconductors to drive forward smartphones and cloud data centers.
Leadership develops in two ways: 1) relative performance, or who is performing better than the others; 2) who bottoms first. Semis have been notable winners, and we believe are showing signs of continuing that leadership into 2023, along with the noticeable rotation into value stocks. Tech investors must be more discerning in this market, but the outsized gains are showing up for those that are watching the seismic shift within the markets.
Since the 2022 bear market began, semiconductors have been leading the broad market once again, except on the way down. When the leaders of a bull market continue to lead on the way down, it becomes a big warning that the predominant bull market is shifting. On November 22, 2021, SMH put in its high. On January 4th, 2022 the S&P 500 put in its high, as the semiconductors made a lower high. This was the same pattern we saw in 2008/2009, except in reverse.
Since then, we have seen 4 major bounces in this bear market. The above chart shows the VanEck Semiconductor Index (SMH) in the black bars, and the S&P 500 in blue. Each time, you’ll note how the SMH continued lower as the S&P 500 tried to rally. This was a warning of more downside to come.
On September 30th, new leadership emerged within the value sector, as many tech names continued lower. Darlings like TSLA, MSFT, AMZN, GOOGL continued to make new lows well into October. Meanwhile, many names in the boring Dow Jones Industrial Average (DJI) bottomed first, and have outperformed the S&P 500 since this recent bounce began.
As it appears that value is now leading, many have discarded tech, which is unfortunate. Though you must be discerning in this market, there are several tech names, like Netflix and Enphase, to name a few, that bottomed before the S&P 500, and are more than double the returns of the Dow Jones Industrial Average off the low.
What this rotation is signaling is twofold: 1) what the market wants to see is earnings, cash flow and stable profits. The old tech themes prior to 2021, which is growth at any cost, is over; 2) Even though it did not bottom before the broad market, one of the key leaders in this bounce is the semiconductor sector, which is a clue to what area of tech will likely lead in the next bull cycle.
Off the October 13th low, SMH climbed 40%, compared to the S&P 500 that climbed +17.45%. Even with the obvious rotation into value oriented names, SMH is still a leading sector off the October 13th low, where the Dow is up 21%.
As long as the October lows hold any additional weakness, it’s worth acknowledging that this trend could morph into semis being a (quiet) leader for when a bull market resumes. At the very least, SMH may not see new lows. If DJI and SMH, being notable leaders in this bounce, and do break their lows, I’d take this as a clear sign bear market will continue. This helps to illustrate the importance of SMH’s leadership.
In conclusion, with the information we have now, semis are most likely to lead the next bull cycle. Whether this bull cycle starts in 2023 or 2024 is unclear at this time. The catalyst within the burgeoning AI/Machine Learning tech trend, as well as the growth of EVs/automotive, and cloud, will cement their dominance. This also lines up with what the market is looking for in terms of profitability, as most semis are cash efficient companies with many offering dividends. Even though semiconductor stocks are not as exciting as owning a FAANG, we will look to add to our semiconductor positions on any weakness as we enter a new year.